Commissioners for His Majesty’s Revenue and Customs v HFFX LLP; Atkins and others v Commissioners for His Majesty’s Revenue and Customs [2026] UKSC 17

Individual members of forex trading LLP HFFX used a Capital Allocation Plan to defer remuneration via a corporate partner, GSAM, taxed at lower corporation tax rates. The Supreme Court held the deferred sums were taxable as income under section 687 ITTOIA, but section 850 did not apply.

Facts

HFFX LLP was a successful foreign exchange trading partnership established in 2010 as part of the GSA investment management group. Its individual members, led by Mr Alexander Gerko as Managing Member, researched and formulated high frequency forex trading strategies. To minimise the tax burden on profit distributions to the individual members, HFFX implemented a Capital Allocation Plan (the CAP) under its LLP Deed.

Under the CAP, approximately 50% of the profits that would otherwise have been allocated to participating individual members were instead allocated to a corporate member, GSA Member Limited (GSAM), held by a Cayman Islands business purpose trust. GSAM paid corporation tax on the allocation, invested the net amount in GSA fund shares, and over three years sold the shares in tranches, contributing the proceeds to HFFX as “Special Capital”. GSAM then exercised its discretion to reallocate Special Capital to individual members, who could then withdraw it.

The intended tax effect was that profits would attract corporation tax (at a lower rate) in GSAM’s hands rather than income tax in the individual members’ hands. The tribunals found that tax avoidance was one of the main objects of the CAP, although it also had genuine commercial purposes of retention and incentivisation of members. The discretion exercised by Mr Gerko and GSAM was accepted to be subject to the implied Braganza obligations of rationality and proper purpose.

Issues

Two appeals were before the Supreme Court:

HMRC’s appeal

Whether the profit shares allocated to GSAM should be treated as the individual members’ profit shares in accordance with HFFX’s “profit-sharing arrangements” under section 850 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). HMRC invited the Court to overrule the Court of Appeal’s reasoning in Dodd v HMRC (BlueCrest) [2023] EWCA Civ 1481.

The individual members’ appeal

(1) Whether the Special Capital received under the CAP was income charged to tax under section 687 of ITTOIA (income not otherwise charged); and (2) if not, whether the receipts were deemed to be the individual members’ income under Chapter 4 of Part 13 of the Income Tax Act 2007 (sales of occupation income).

Arguments

HMRC’s submissions

HMRC contended that the amounts allocated to GSAM constituted allocations of profit to the individual members, falling within section 850. They argued that the Court of Appeal in BlueCrest had failed to give proper weight to the object and purpose of section 850, which (they said) required taxation according to the commercial reality of the division of partnership profits. On section 687, HMRC argued the deferred payments were not voluntary, had a source in the exercise of contractual discretion under the LLP Deed governed by Braganza principles, and constituted income.

The individual members’ submissions

Mr Prosser KC argued that section 850 did not apply because individual members had no contractual right during the relevant period to receive sums allocated to GSAM; GSAM’s discretion was a real one. On section 687, he submitted there was no relevant “source” because the source must be something possessed by the recipient, and the payments depended entirely on GSAM’s discretion. He also raised a new point on section 575 of ITTOIA, contending that the income should be dealt with under Part 2 (receipts of a trade) rather than Part 5.

Judgment

Section 850 of ITTOIA

The Supreme Court (Lord Sales giving the lead judgment, with whom Lord Lloyd-Jones, Lord Hamblen, Lord Burrows and Lady Rose agreed) dismissed HMRC’s appeal. Section 850 requires that a partner’s share of profits be determined according to the firm’s profit-sharing arrangements during the relevant period, meaning that the arrangements must include a contractual right for the partner to receive the relevant share. Drawing on the Partnership Act 1890 and the “look-through” principle of partnership taxation, Lord Sales held that the entire profit of the partnership must be allocated according to contractual rights subsisting in the relevant period.

The individual members had no contractual right during the relevant period to receive sums allocated to GSAM as part of the ordinary profit allocation process. The CAP had genuine commercial purposes and there was nothing illusory about the allocation to GSAM. Lord Sales agreed with Sir Launcelot Henderson’s analysis in BlueCrest CA and rejected HMRC’s purposive argument as “pitched at a level which is too general and abstract, and is untethered from the language used by Parliament”.

Section 687 of ITTOIA

The Court dismissed the individual members’ appeal. Section 687 was a residual charging provision replacing Case VI of Schedule D. It was implicit in section 687(1) that the income must arise from an identifiable source. Lord Sales analysed Cunard’s Trustees v IRC [1946] 1 All ER 159, where Lord Greene MR had stated:

The payments, therefore, in my opinion, were properly made and at the moment of payment became income of the recipient … [Her] title to the income arose when the trustees exercised their discretion in her favour and not before. At that moment a new source of income came into existence.

Lord Sales held that the exercise of a discretion framed by a legal instrument to pay a sum as income is naturally regarded as a “source” for tax purposes. Where there is an identifiable reason, framed by powers and obligations arising from a legal instrument, for a payment of income to be made, that is properly identified as the relevant “source”.

The individual members’ rights under the LLP Deed, combined with decisions taken in their favour to reallocate Special Capital and the application of the Braganza obligations, amounted to a source from which the receipt was derived. The Court analysed Drummond v Collins, Stedeford v Beloe, Brocklesby v Merricks, Manduca v HMRC, Rhodesia Metals and Mitchell and Edon v Ross, holding they supported rather than undermined this conclusion. Mr Prosser’s submission that a source must be “possessed” by the recipient was rejected: section 687 refers only to a source of the income, not a source possessed by the recipient.

Section 575 of ITTOIA (new point)

Permission was granted to raise this point. It was dismissed: there was no relevant overlap between taxation of HFFX’s underlying trading profits and taxation of the deferred remuneration paid by GSAM to individual members. The deferred remuneration was paid out of GSAM’s funds, not HFFX’s, and there is no general principle that a taxpayer can deduct tax paid by another person on funds used to pay income.

Chapter 4 of Part 13 of ITA 2007

As section 687 applied, it was unnecessary to determine this issue. The Court reserved its opinion and should not be taken as endorsing or disapproving the Upper Tribunal’s reasoning.

Implications

The decision provides authoritative guidance on the limits of purposive statutory interpretation in tax legislation. Lord Sales confirmed that while a purposive approach is appropriate, the purpose must be identifiable from the statutory language and the wider meaning must be needed to prevent frustration of Parliament’s intention. HMRC’s appeal to general commercial reality, untethered from statutory language, was rejected.

On section 850, the decision confirms that partnership profit allocations for tax purposes follow contractual rights subsisting in the relevant period. Where a corporate partner genuinely receives a profit allocation under the partnership agreement, that allocation cannot be re-characterised as belonging to individual partners simply because deferred remuneration arrangements ultimately benefit those individuals. This affirms the reasoning in BlueCrest CA.

On section 687, the judgment clarifies the meaning of “source” in the residual income tax charging provision. A source need not involve an absolute legal entitlement to payment; the exercise of a contractual discretion, particularly one constrained by Braganza obligations, within a legal framework conferring rights on the recipient, can constitute a source. This significantly broadens the practical reach of section 687 in catching deferred remuneration and discretionary payment arrangements that fall outside other specific charging provisions.

For practitioners advising on partnership and LLP remuneration structures, the decision means that deferred remuneration mechanisms routed through corporate partners may avoid section 850 but will likely fall within section 687 where the payments are made pursuant to discretionary mechanisms governed by Braganza principles. The case demonstrates that even commercially valid deferred remuneration arrangements cannot escape income tax altogether where individual members ultimately receive payments connected to a legal framework defining their rights.

The Court expressly did not determine the application of Chapter 4 of Part 13 of ITA 2007 (sales of occupation income), leaving that point to be argued afresh in a determinative case.

Verdict: HMRC’s appeal in relation to section 850 of ITTOIA was dismissed. The individual members’ appeal in relation to section 687 of ITTOIA was dismissed. The individual members are accordingly liable to income tax under section 687 on the deferred remuneration sums received under the Capital Allocation Plan. The issue under Chapter 4 of Part 13 of ITA 2007 was not determined.

Source: Atkins v Commissioners for His Majesty's Revenue and Customs [2026] UKSC 17